What Do the New Trump Tariffs Mean for US Fed Interest-Rate Cuts?

  • As global markets plunge in the aftermath of the Trump administration’s sweeping new tariff plan and worries about a potential recession rise, investors are thinking the Federal Reserve may now move faster to cut interest rates.
  • The shift has to do with the changing outlook for growth in the United States, according to analysts. While new tariffs could exacerbate inflation in the short term, it’s possible that the Fed may support the economy by lowering interest rates rather than keeping rates restrictive to combat elevated price pressures. On Friday, Fed Chair Jerome Powell said the central bank will not rush any policy moves: “It feels like we don’t need to be in a hurry. We’re going to have to wait and see how this plays out before we start to make adjustments.”
  • But the outlook remains fluid. “A tariff-induced economic downturn may be enough” to prompt the Fed to cut despite elevated inflation, explains Dominic Pappalardo, chief multi-asset strategist at Morningstar Investment Management. That would be a departure from the Fed’s typical inflation playbook, which calls for restrictive policy to temper price pressures.
  • Treasury yields have been falling alongside stocks as investors reduce their expectations for growth down the line, with the yield on the 10-year Treasury note falling below 4% on Friday. “The market is clearly more concerned with economic growth than they are with inflation from the tariffs,” says Michael Arone, chief investment strategist at State Street Global Advisors. “I’m sure the Fed would share that concern.”
  • Bond futures markets are pricing in an 85% chance of more than three rate cuts before the end of the year, according to the CME FedWatch Tool. That’s up from expectations of between one and two cuts before the tariff announcement. If the Fed cuts four times, it would bring the target federal-funds rate down to a range of 3.25%-3.50%—2 full percentage points lower than its peak last year.
  • Traders now see a roughly 30% chance that the central bank cuts rates at its May meeting, compared with the 22% odds given on Thursday. Futures trading was volatile on Friday, with odds of a May cut rising as high as 40% in the early afternoon. A June cut remains seen as most likely, given odds of 70%.

(Source: Morningstar)